What is a low credit score?

A
bad credit rating occurs when the debtor (person owing money to a
creditor) fails to make the loan payments as agreed or simply walks
away from the debt obligation. A low credit score (see below)
represents bad credit, while a high credit score is an indicator of
good credit.

The interest rate is often
higher with individuals with bad credit because lenders face a
greater risk that the individual will miss payments or default on
the loan.

Late payments, tax liens, accounts in collection, judgments,
repossessions, bankruptcies, foreclosures, settlements, and charge
offs are considered bad credit and will have a powerful impact on
the credit score. If you have one of these items on your credit
report or several of them, the odds of having a lower credit score
are much higher compared to someone with a clean credit history.

There are five factors that determine a credit score.

Payment History:

The payment history is the single most important component of the
credit score (35%). A single late payment can reduce a credit score
by 40 to 100 points. Multiple late payments will reduce the credit
score even further. The higher the credit score is when the late
payment occurs, the greater the impact on the credit scores.

Credit utilization:

The credit score formula is based on the individual's use of
credit. 30 percent of the overall credit score is dependent on a
borrower's credit utilization. In other words, if the balance on
credit cards and other revolving accounts are close to the high
credit limit, the credit score will be revised downward. Experts
suggest account balances should be at or below 50% of the high
credit limit.

Credit history time-span:

15 percent of the total credit score is based on the length of
time each credit account has been open and the period of time since
the account's most recent action. A longer credit history gives more
detail about a borrower's payment reliability and provides a clearer
picture of long-term bill paying behavior.

Credit mix and new credit each comprise 10 percent
of the total credit score:

Individuals with bad credit should avoid opening credit accounts,
because recent credit inquires and new loans can suggest financial
trouble.

Credit mix indicates the individual can handle all types of credit.
Statistically, borrowers with a good credit mix of revolving credit
and installment loans generally represent a lower risk for lenders.

How to improve bad credit

1. Request a free copy of your credit report and check it for
errors. Your credit report contains the data used to calculate your
score and it may contain errors. In particular, check to make sure
that there are no late payments incorrectly listed for any of your
accounts and that the amounts owed for each of your open accounts is
correct. If you find errors on any of your reports, dispute them
with the credit bureau. Go to the
Federal Trade Commission and obtain your free credit report from
Equifax, Experian and TransUnion.

2. Since payment history has the greatest impact on a credit score,
it’s important to pay your bills on time. Late and delinquent
payments will have a major negative impact on the credit score.
Missed payments should be paid current and stay current. The credit
score will increase the longer you pay your bills on time after
being late. Past credit problems fades as time passes as recent good
payment patterns show up on the credit report.

Pay off collection accounts. It should be noted that the paid off
collection accounts will stay on the report for seven years.

Amounts Owed Tips

3. Try to keep credit balances as low as possible on credit cards
and other "revolving credit". High outstanding debt will affect a
credit score. Avoid moving debt around. Try to pay off the
outstanding balance or reduce the balance by one half. Do not close
unused credit cards. Closing active credit accounts can actually
hurt your credit score and don't open new credit cards that are not
needed.

Length matters

4.
New credit accounts will lower the average account age, which
impacts the FICO scores. Rapid credit buildup can appear risky to
lenders. Don't open a lot of new accounts too rapidly.

Types of Credit Use Tips

5.
Only apply for and open new credit accounts only as needed.

Don't open credit accounts just to have a better credit mix, chances
are, it probably won't increase your credit score.

It’s ok to have credit cards, but manage them responsibly.

To summarize, "fixing" a credit score is more about fixing errors in
your credit history (if they exist) and then following the
guidelines above to maintain consistent, good credit history.
Raising your scores after a poor mark on your report or building
credit for the first time will take patience and discipline.

The calculators and information contained herein are made available to
you as a self-help tool for illustrative use only. Examples are hypothetical.
We can not and do not guarantee the applicability or accuracy in regards
to your individual circumstances. I encourage you to seek personalized advice
from qualified professionals.